Know the VA or stay away

Here’s another investment vehicle that should come with a very detailed warning label. In the wake of the 2008-09 financial meltdown, life insurance companies began raising the costs and lowering the guarantees tied to variable annuities — especially those sold with guaranteed-living-benefit riders. The impetus behind this change was the insurers’ realization that VA contracts written before the market crash left them overexposed to liabilities. It was also an effort on the part of insurers to adjust to the higher costs of managing against risk after the crash.

Lately, however, the quest for self-preservation has led insurers to go one step further when it comes to protecting themselves from VAs. A number of firms, including Axa Equitable Life Insurance Inc. and The Hartford Financial Services Group Inc., are taking advantage of provisions in existing contracts that allow them to block investors’ future contributions or restrict their equity exposure.

This latest development, of course, leaves investors feeling like victims of bait-and-switch. Even worse, it pulls the rug out from under their retirement plans when the annual income they earn from a VA turns out to be far less than expected.

InvestmentNews reporter Darla Mercado aptly pointed all this out in a recent story, “VA customers irate about rule changes” (July 22).

As with the purchase of a house, car or almost anything else, investors are ultimately responsible for making sure they know what they are getting into when they buy a VA. That said, financial advisers and planners have a responsibility to ensure that clients fully understand the nuances of their VA contracts before they sign on the dotted line.

As advisers are guardians of their clients’ financial well-being, their responsibilities go beyond education. In a world where insurers reserve the right to crack down on investment options or cut off contributions, the onus for monitoring existing contracts falls squarely on the shoulders of financial advisers. And there it remains — regardless of whether the adviser sold the annuity in the first place.

Advisers dealing with annuities should have in place a rigorous process for monitoring those contracts. Those who cannot or do not want to accept that responsibility should enlist the help of a qualified due-diligence service.

ON THE LOOKOUT

In monitoring existing annuity contracts, advisers should be on the lookout for changes that may result in the permanent loss of a client’s lifetime guarantee if action is not taken.

The bottom line is this: Advisers who do not want to take the time to understand VA contracts fully, and provide continuing monitoring of those contracts, should steer clear of selling annuities or working with clients with existing contracts.

On this, we agree with Moshe Milevsky, associate professor of finance at the Schulich School of Business at York University, who was quoted in Ms. Mercado’s story as saying: “[Advisers] shouldn’t stick their toe in halfheartedly. You have to know the products or you stay away. You don’t dabble in it.”